It may sound counter-intuitive considering the global financial crisis and subsequent equity market rout, but Australian shares were the best performing asset class in the past 20 years, a survey by advisory firm Russell Investments and the ASX has found.

In the two decades to June 2012 Australian shares held inside superannuation funds gained 9.2 per cent annually after taxes and expenses were taken into account, against an 8.2 per cent increase for resident property, the next best performing asset class.

The result will surprise many equity investors, who have endured long periods of share price volatility since the S&P/ASX 200 hit a record high of 6830 in November 2007.

On Monday the benchmark index was trading below 4000 as Europe’s sovereign debt crisis spread to Spain and Cyprus, the recovery in the United States lost momentum and investors worried about China’s ability to prop up global growth.

AFR
AFR

But for investors who remember former prime minister
Paul Keating
’s “recession we had to have" of the early 1990s, the result of the Russell survey may come as less of a shock. In 1990, the standard mortgage rate was 17 per cent, against about 7 per cent today, putting a large dent in returns. “Property would not have been a great investment," Greg Liddell, director of consulting and advisory services at Russell, says.

Despite the obvious setbacks such as high interest rates in the early 1990s and the sharemarket collapse of 2008, both residential property and equities have been “quite attractive" investments, argues Liddell, pointing out that the average inflation rate over the past two decades was 2.9 per cent.

“While there have been shorter periods of time in history when cash and bonds have outperformed shares, over the long run history has shown that equities have delivered superior returns, especially taking into account the relative impact of tax," Russell says.

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The same might not be said of bonds, however. Another of the survey’s findings was that Australian bonds held inside a super scheme outperformed global equities by 0.4 of a percentage point in the two decades.

While local bonds posted an annual 6.5 per cent gain, offshore equities recorded an annual rise of only 6.1 per cent. Unhedged equity portfolios fared even worse, showing gains of 4.4 per cent annually.

Liddell warns that investors hoping to earn a decent rate of return while hopefully sleeping better at night by putting more money into fixed income should not get too excited. One of the reasons bonds performed so well was that in 1991 the Australian 10-year government bond was yielding 10.1 per cent.

Even a decade ago the yield was 5.8 per cent. That figure has now fallen to below 2.8 per cent, as government debt of AAA-rated countries has been treated as a safe haven by global investors looking to escape the horrors of the European debt crisis and gyrating sharemarkets.

“In nominal terms, bonds should perform less well over the next 20 years," Liddell says.

Over shorter investment spans, the relative returns of a variety of asset classes look quite different.

In the past 10 years residential property was the best performing asset class when it was held by a super fund and after taking into account tax and expenses.

The survey should be welcome reading for investors struggling to see past the seemingly endless downward spiral in global equity prices.

For those who have time on their side, shares still look like they are a decent place to be.

But, notes Liddell, this is not the case for retirees or people approaching retirement, who might need to start selling their investments to fund their lifestyle.

For this group, the average return over time is not as important as the sequence of those returns.